Markets expect one more Fed hike but caution is warranted

The markets are anticipating the Federal Reserve to raise interest rates by a quarter-point on Wednesday and then take a break. However, investors should be cautious as they recall the surprising move by Australia's central bank, which increased rates by 25 basis points on Tuesday and warned of the possibility of further rate hikes due to inflation. The market had assumed that the Reserve Bank of Australia would not increase rates after they paused rates in April. As a result, the Australian dollar and government bond yields rose, while stocks fell. This illustrates the difficulty of predicting the future course of interest rate hikes. Even if the expected hike on Wednesday is the last in the cycle, Fed Chairman Jerome Powell is unlikely to announce it. Moreover, there is a discrepancy between the market and the U.S. central bank that has yet to be resolved. Recent data shows economic growth is stalling, which supports the case for a pause. However, the core inflation does suggest that there are elements of sticky inflation. If this persists, it will worry the Fed and likely spur them into further action.

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Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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